House prices to fall in 8 months

An array of global forces and debt constraints are likely to put a limit on house price increases next year, according to Citibank (Citi) research.

“Our model suggests that house price inflation may peak at around 3% by March 2014 and prices could fall slightly thereafter,” said Citi spokesmen Paul Brennan and Joshua Williamson.

“[The research] looks at the impact of Chinese immigration, a falling dollar, rate cuts and a number of other scenarios. Overall it says that a housing market ‘bubble’ is not likely to eventuate over our forecast horizon even under the most optimistic assumptions.”

Brennan and Williamson said that, with the cash rate at record low levels, some forecasts are for prices to rise sharply creating financial stability risks.

But looking ahead, the two said the slowdown in Chinese growth and fall in Chinese immigration into Australia, the lower AUD and the limited appetite for further increases in loan size counter the favourable effect on house prices of low interest rates.

“Assuming no further rate cut, the model suggests that house price inflation may peak at around 3% by March 2014 and prices could fall slightly thereafter.”

In the longer term, Brennan and Williamson said there are potential downsides to the Australian housing market.

“We expect the nominal house price to peak in March 2014, by which time it will have increased by 3% from its current level,” the said. “We expect the slowdown in China to flow through to the Australian housing market during 2014, causing downward pressure on house prices.”

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